The CBRT holds foreign exchange reserves in support
of a range of objectives which include assisting
the Turkish Government in meeting its foreign
exchange denominated domestic and foreign debt
obligations, maintaining foreign exchange liquidity
against external shocks, supporting the monetary
and exchange rate policies and giving confidence to
the markets. The legal basis for the CBRT’s reserve
management practices derives from CBRT Law No.
1211. Additionally, guidelines and decisions made by
the Board based on the authority granted by the Law
constitute the other basis of the foreign exchange
and gold reserve management practices.

The institutional decision-making framework of
reserve management has a three-tier hierarchical
structure. The Board, as the top decision-making
authority of the CBRT, determines the general
investment criteria for reserve management by
approving the Guidelines for Foreign Exchange
Reserve Management that are prepared in
accordance with the reserve management
priorities set by the Law as security, liquidity and
return, respectively and authorizes the Executive
Committee and the Foreign Exchange Risk and
Investment Committee (FXRIC) to make decisions
regarding implementation. The decisions made by
the Executive Committee and FXRIC in accordance
with the Guidelines for Foreign Exchange Reserve
Management approved by the Board constitute the
second-tier of the institutional decision-making
process. At this stage, the benchmark portfolio,
which reflects the general risk tolerance and investment strategy of the Bank, is determined
and approved. According to the strategic asset
allocation preferences of the Bank, the benchmark
portfolio is determined by the FXRIC at each year-
end to be implemented in the following year and
becomes effective with the approval of the Executive
Committee. The last tier of the institutional decision-
making process is the implementation of reserve
management practices within the limits specified
by the Guidelines and the benchmark portfolio.
Reserve management activities are carried out within
an organizational structure formed in accordance
with the separation of duties principle. Accordingly,
reserve management activities are performed by the
Foreign Exchange Transactions Division whereas risk
management related to the reserve management
operations is carried out by the Foreign Exchange
Risk Management Division.

Based on the objectives and limits set by the
Guidelines and the benchmark portfolio, reserve
management operations are conducted through
spot and forward purchases and sales of foreign
exchange in international markets, other derivative
instruments, time deposit transactions, purchase and
sale of securities, repo and reverse repo transactions,
securities lending transactions, export and import of
foreign exchange banknotes, and transportation of
foreign exchange banknotes in the country among
local branches.

Gold reserves of the CBRT, which are of international
standards, are managed within the regulations and
constraints stated in the Law and the guidelines set
by the Board. Pursuant to these Guidelines, the CBRT
may conduct outright purchase and sale transactions,
gold deposit transactions and gold swap transactions.
According to the new regulation initiated October
2011, Turkish commercial banks have an option to
fulfill a certain portion of their reserve requirements
with standard gold. In this respect, gold holdings
rose to 532.3 tons and gold reserves constitute 15.9
percent of total reserves as of 26 December 2014
(Graph 34).

Controlling risks that the CBRT is exposed to during
reserve management operations starts with the
strategic asset allocation process; in other words,
when defining the benchmark portfolio. Once the
currencies and instruments to be used in reserve
management and the duration target for the
investments are set, the expected return and financial
risks involved in reserve management are also
determined to a great extent. Reflecting the Bank’s
preferences regarding strategic asset allocation, the
benchmark portfolio consists of the target currency
composition, duration targets and related deviation
limits from these targets, the number and size of
sub-portfolios to be held in major reserve currencies,
overall credit risk limits and the investment universe
representing eligible transaction types, countries
and instruments to invest in. The aim in determining
the benchmark portfolio is to ensure that an
adequate return is obtained while observing capital
preservation and liquidity constraints to devote the
utmost importance to the prudent management of
foreign exchange reserves, hence the national wealth
of the country. After the overall acceptable risk level
is defined with respect to the CBRT’s risk tolerance
through the benchmark portfolio, the existing risks
are measured, monitored and reported regularly.

Despite positive signs of global economic recovery,
the continuing impacts of the global financial crisis
witnessed in previous years played an important
role in determining the CBRT’s reserve management
strategies in 2014 too. In this context, as financial
risks remained elevated in 2014, the conservative
approach continued and all necessary measures
were taken to preserve the value of reserve assets.

In brief, reserve and risk management practices were
performed in line with contemporary practices by
taking into account the CBRT’s own requirements
and theoretical and technical progress in reserve
and risk management practices together with
developments in the international economy and
financial markets.